This Stock Is Overvalued By 43%

Aixtron SE (NASDAQ:AIXG) provides deposition equipment to the semiconductor industry. Its products are used in advanced components of fiber optic communications systems, wireless and mobile telephony applications among other technologies. Last year, the company generated revenues of $611 million down from $784 million in 2010.

The company has a market capitalization of $1.58 billion and has no debt on its balance sheet. The stock was a terrible performer, losing 60% during the last 12 months. The current dividend yield of the stock is 5.2%. In this article, I will perform valuation analysis to determine the fair value and 12-month price target.

I started my analysis by reviewing the historical growth rates for AIXG. These are shown in the table that follows:

Growth Rates

3 Year

YOY

QOQ

Revenue

26%

-22%

-38%

Income

15%

-59%

N/A

EPS

15%

-59%

N/A

The stock's 1 year decline of 60% matches the drop in EPS during the last year. In fact, the quarter on quarter growth rate is lower than the year over year rates indicating difficult operating conditions. Going forward, I predict a long term growth rate of 15% on par with the semiconductor equipment industry.

Next, I evaluated the company's profitability and operational metrics which are shown in the table that follows. The gross margins and operating margins have improved during the trailing twelve month period, but are below the company's 3 year average. However, the return on equity and assets are healthy and on par with the historical averages.

Profitability & Operations

3 Year

1 Year

TTM

Gross Margin

45%

38%

41%

Operating Margin

25%

18%

23%

Net Margin

17%

13%

16%

Return on Equity

22%

13%

21%

Return on Assets

16%

10%

16%

To compare AIXG's performance to that of its peers, I evaluated the margins and operational aspects of some of the other companies in the semiconductor industry. The peer group selected as part of this analysis included ASM International (NASDAQ:ASMI), Novellus Systems (NASDAQ:NVLS), Amtech Systems (NASDAQ:ASYS), Veeco Instruments (NASDAQ:VECO), Applied Materials (NASDAQ:AMAT), CVD Equipment Corporation (NASDAQ:CVV) and Lam Research Corporation (NASDAQ:LRCX).

Ticker

Market Cap

P/E

P/S

D/E

ROA

ROI

GM

OM

AIXG

1.58B

15.48

2.05

0

9.94

12.93

37.88

18.48

ASMI

1.95B

8.79

0.91

22.79

22.61

45.99

35.62

22.34

NVLS

3.30B

15.01

2.45

34.11

13.3

15.45

49.14

22.29

ASYS

78.20M

4.77

0.32

0

12.94

21.65

36.75

15.52

VECO

1.14B

6.5

1.18

0.32

18.28

24.83

48.44

27.87

AMAT

15.98B

10.68

1.52

22.12

15.53

20.14

41.46

22.77

CVV

68.89M

21.01

4.29

20.89

2.31

2.73

36.17

5.82

LRCX

5.00B

12.58

1.55

29.9

22.12

27.3

46.24

24.84

Average

11.85

1.78

16.27

14.63

21.38

41.46

19.99

Valuation:

Valuation analysis was performed using relative valuation. The multiple used in the analysis was developed using historical analysis of the company's and the peer group's multiples. The table below shows the valuation analysis results.

Valuation

AIXG

Next Yr Proj EPS

$0.42

EPS Growth Rate

15%

Future EPS (5 Yr)

$0.64

Expected P/E

29.2

Price 5 Yrs Out

$18.65

Unlevered Beta

2.20

D/E Ratio

0%

Current Tax Rate

35%

Levered Beta

2.20

Risk Free Rate

2%

Risk Premium

6.00%

Size Premium

1.63%

Cost of Equity

16.8%

Fair Value

$8.92

Current Price

$15.69

% Overvalued

43%

As shown in the table above, AIXG is grossly overvalued at current levels. I will be following what I preach and plan on closing my existing position in AIXG shortly.The stock makes a great short candidate to capitalize on any decline in the stock markets.

Disclosure: I am long (AIXG). I will sell my position in AIXG during the next 3 days.

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